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Portfolio Management : Advisory vs Discretionary, The Pros and Cons are Changing

By 18 May 2016October 11th, 2023No Comments

In many of the wealth management groups that I visit around the world, we find that they have a portfolio proposition that is either advisory, discretionary, or perhaps have both. What I find interesting though is why their propositions are such and whether they are open minded to the alternatives.

In the advisory proposition camp, we often find that the key drivers on the positive side are that this method supports a highly client engaging and interacting proposition, supports relationships, and in other ways is regarded as often with a lower business risk as each adjustment to the portfolio is done with the client’s approval. The downsides of the advisory proposition for the adviser, and possible also the client, is that it requires for the adviser to establish contact with the client, for the client to approve the portfolio adjustments, a process which may have challenges if the client is not in the same time zone as the adviser, may not be contactable, or just doesn’t want to think about any portfolio adjustments at that time.

In the discretionary camp, the clear benefits are that the adviser or portfolio manager can take advantage of short term market opportunities, perhaps can get leverage of the whole book size (or many portfolios at the same time), and reduce or eliminate the workflows for client communications and confirmations when adjusting portfolios. Also this model is inherently more scalable as less ‘workflows’ to involve external people (ie clients) are required. The downside however is that in many countries the regulatory overheads and approvals to offer a discretionary service to investors is sometimes quite challenging in terms of license approvals, education and experience requirements and often firm capital adequacy requirements.

What I find interesting is that in some countries the discretionary service is regarded as the ‘premium’ service for more valuable clients, and advisory for the broader client range, whereas in other countries it is the other way around. Clearly this is historical in it’s positioning.

Now enter the world of new technologies over the last 10 or so years, like smartphones, interactive web sites and global internet connectivity. A combination of these essentially help overcome some of the challenges of the advisory portfolio proposition as it can be easier to communicate with clients and get their approvals (at Financial Simplicity this can be done with dual factor authentication in a couple of clicks). Compounding this with the ability to produce high quality personalised portfolio reviews with massive scale and efficiency though Financial Simplicity’s digital platform, and we have now sufficient enough ingredients and removal of the frictions of the advisory model to make it a lot more efficient, and more scalable also.

Whilst clearly the advisory model will not by definition suit the client that expressed strong preference or instruction that they just doesn’t want or need to be contacted (which may come with additional costs to support the regulatory increases to deliver such), some of the business and operating barriers and considerations can be ironed out and / or be removed to make it more attractive.

Picture this:

  1. Each adviser can use portfolio intelligence capabilities from Financial Simplicity’s digital platform to monitor all their client portfolios (could be thousands) for required portfolio adjustments. Within seconds they can identify which client portfolios need adjustment for current market conditions or research.
  2. Then for those client portfolios that warrant adjustments, the adviser can use Financial Simplicity’s digital platform for personalised portfolio modelling / rebalancing workflows in seconds again to produce personalised portfolio reviews for such clients. With the automation in Financial Simplicity to support this, they may do this for dozens of even hundreds of client portfolios within minutes.
  3. Assuming the clients have phones or email. the adviser can then use their email / CRM / SMS or whatever ways of communication they desire to communicate with their clients electronically.
  4. The clients can read the portfolio review documents and can then either speak to the adviser or use on-line methods (built into Financial Simplicity’s digital platform) to approve the portfolio adjustments for the adviser.
  5. The adviser then implements the portfolio adjustments according to their workflows and methods which could involve methods to efficiently make trades for clients en-masse.

In the same way that discretionary managers may only make smaller adjustments to portfolios in a day, should the above process be sufficiently efficient, then it may be that each client portfolio review will just be smaller adjustments, requiring less contemplation or time to consider by each client, improving overall end to end efficiency.

When faced with the decision of advisory vs discretionary portfolio propositions (or both), the above operating model raises a number of questions that can help firms finesse their proposition, or combinations of propositions:

  1. What is the client engagement model that each client prefers, to ensure to deliver a service to their requirements?
  2. What the different economics of the different operating models? Are now the costs of monitoring, reviewing / rebalancing portfolios and communicating with clients now down to a cost level that makes it more appealing than a discretionary offer (with associated regulatory overheads perhaps)?
  3. What are the set up and establishment costs (ie licensing, capital adequacy, resourcing, compliance etc) for the different proposition types?
  4. Where are the technology trends likely to move in the future in terms of client engagement?
  5. What pricing levels, premiums or discounts can the firm provide for each type of proposition compared to the other – which is cheaper or more expensive to operate? what is the relative value in the eyes of the different client types?
  6. Now do I segment my clients more around how they want to be engaged rather than how much monies they have for investing?

With digital platforms such as Financial Simplicity that can enable very efficient and massively scalable advisory or discretionary portfolio propositions, there clearly are opportunities for firms to think hard about, and be creative with, the type of propositions they want to offer, and accommodate broader ranges of clients. The profitability of each proposition I suspect will be quite influenced by how regulators regulate the different proposition types, overlaid with the increasing ease of use of networked technologies to bring the adviser and the client closer together.

I also am guessing that moving forward, wealth management firms may find themselves in a position where the client may have apps and technologies in their hands that will define how their service providers will interact with them if they want their business. The ever changing technological, regulatory and social landscape that we operate in I doubt will keep evolving and changing.

If you find this interesting, feel free to reach out to us at Financial Simplicity, it may start you on a better journey.

Stuart Holdsworth

Author Stuart Holdsworth

Stuart has over 30 years of experience in the use of technology for the strategic competitive advantage of businesses in the financial markets and investment industry.

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